<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
October 4, 2000
(Date of Report)
(Date of Earliest Event Reported)
WATCHGUARD TECHNOLOGIES, INC.
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 000-26819 91-1712427
(State or Other Jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
505 Fifth Avenue South, Suite 500, Seattle, WA 98104
(Address of Principal Executive Offices, including Zip Code)
(206) 521-8340
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------
None
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
This Amendment No. 1 to the Current Report on Form 8-K of WatchGuard
Technologies, Inc., filed with the SEC on October 19, 2000, relates to
WatchGuard's acquisition of Qiave Technologies Corporation. WatchGuard acquired
Qiave on October 4, 2000, pursuant to an Agreement and Plan of Merger by and
among WatchGuard, Logan Acquisition Corporation, Qiave and certain key
shareholders of Qiave. The purpose of this amendment is to provide the financial
statements of Qiave as required by Item 7(a) of Form 8-K, and the pro forma
financial statements required by Item 7(b) of Form 8-K, which financial
statements were excluded from the original filing in reliance upon Items 7(a)(4)
and 7(b)(2) of Form 8-K.
Qiave is an emerging provider of advanced digital information security for
internetworked Windows NT(TM) and Windows 2000(TM) computing environments.
Qiave's Qsecure product provides digital information protection through Qiave's
LockSolid architecture (patents pending). WatchGuard's acquisition of Qiave
enhances WatchGuard's capability to protect Internet and application servers
from hackers targeting public content residing behind an organization's
firewall.
Under the terms of the merger agreement, a wholly owned subsidiary of
WatchGuard merged with and into Qiave, with Qiave as the surviving corporation.
WatchGuard issued to Qiave stockholders 1,292,997 shares of WatchGuard common
stock, including 299,495 shares that are subject to restriction. In addition,
options to purchase shares of Qiave common stock outstanding at the effective
time of the merger were assumed by WatchGuard and converted into options to
purchase 100,856 shares of WatchGuard's common stock, at an exercise price of
$0.46 per share. WatchGuard paid consideration for Qiave totaling approximately
$70 million, which includes approximately $400,000 in direct acquisition costs
and approximately $19.3 million in deferred stock-based compensation charges
related to the issuance of restricted stock and conversion of Qiave stock
options. The merger will be accounted for as a purchase.
For a copy of the merger agreement and additional information regarding the
merger, please refer to the initial filing of this Current Report on Form 8-K.
-2-
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits
(a) Financial Statements of Business Acquired
QIAVE TECHNOLOGIES CORPORATION
Audited Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors................................................................ 4
Balance Sheet as of September 30, 2000........................................................ 5
Statement of Operations for the period from December 15, 1999 (date of inception) to
September 30, 2000....................................................................... 6
Statement of Shareholders' Equity for the period from December 15, 1999 (date of inception)
to September 30, 2000.................................................................... 7
Statement of Cash Flows for the period from December 15, 1999 (date of inception)
to September 30, 2000.................................................................... 8
Notes to Financial Statements................................................................. 9
</TABLE>
-3-
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Qiave Technologies Corporation
We have audited the accompanying balance sheet of Qiave Technologies Corporation
(the Company), a development-stage company, as of September 30, 2000, and the
related statements of operations, shareholders' equity, and cash flow for the
period from December 15, 1999 (inception) to September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Qiave Technologies Corporation
at September 30, 2000, and the results of its operations and its cash flows for
the period from December 15, 1999 (inception) to September 30, 2000, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
November 2, 2000
-4-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Balance Sheet
September 30, 2000
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 761,622
Other assets 3,268
-----------
Total current assets 764,890
Property and equipment, net 466,432
Security deposits 161,100
Other assets 27,800
-----------
Total assets $ 1,420,222
===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 304,728
Accrued legal expense 259,957
Accrued liabilities 196,602
Deferred rent 5,298
-----------
Total current liabilities 766,585
Shareholders' equity:
Common stock, no par value; 14,150,000 shares authorized;
4,793,833 shares issued and outstanding 26,912
Series A convertible preferred, no par value; 7,293,542 shares
authorized; 7,143,542 shares issued and outstanding 2,989,186
Additional paid-in capital 2,552,743
Note receivable for common stock (2,500)
Deferred stock compensation (2,482,173)
Accumulated deficit (2,430,531)
-----------
Total shareholders' equity 653,637
-----------
Total liabilities and shareholders' equity $ 1,420,222
===========
</TABLE>
See accompanying notes.
-5-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Statement of Operations
For the period from December 15, 1999 (inception)
to September 30, 2000
<TABLE>
<S> <C>
Costs and expenses:
General and administrative $ 1,037,514
Marketing and selling 641,714
Research and development 808,385
-----------
2,487,613
Loss from operations (2,487,613)
Interest income, net of interest expense 57,082
-----------
Net loss $(2,430,531)
===========
</TABLE>
See accompanying notes.
-6-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Statement of Shareholders' Equity
For the period from December 15, 1999 (inception) to September 30, 2000
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Note
Shares Amount Shares Amount Capital Receivable
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 15, 1999 - -
Issuance of Common Stock 4,608,333 $17,637
Issuance of Preferred Stock, net
of issuance costs of $47,052 7,143,542 $2,989,186
Exercise of stock options 135,500 6,775
Note receivable for common stock 50,000 2,500 $(2,500)
Recognition of deferred
compensation associated with
stock options $2,552,743
Amortization of deferred
compensation associated with
stock options
Net loss
-----------------------------------------------------------------------------
Balance at September 30, 2000 7,143,542 $2,989,186 4,793,833 $26,912 $2,552,743 $(2,500)
=============================================================================
<CAPTION>
Deferred Total
Stock Accumulated Shareholders'
Compensation Deficit Equity
----------------------------------------------
<S> <C> <C> <C>
Balance at December 15, 1999 - -
Issuance of Common Stock $ 17,637
Issuance of Preferred Stock, net
of issuance costs of $49,552 2,989,186
Exercise of stock options 6,775
Note receivable for common stock -
Recognition of deferred
compensation associated with
stock options $(2,552,743) 0
Amortization of deferred
compensation associated with
stock options 70,570 70,570
Net loss $(2,430,531) (2,430,531)
----------------------------------------------
Balance at September 30, 2000 $(2,482,173) $(2,430,531) $ 653,637
==============================================
</TABLE>
See accompanying note.
-7-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Statement of Cash Flows
For the period from December 15, 1999 (inception)
to September 30, 2000
<TABLE>
<CAPTION>
Operating activities
<S> <C>
Net loss $(2,430,531)
Adjustment to reconcile net loss to cash used in operating activities:
Depreciation and amortization 60,214
Amortization of deferred stock compensation 70,570
Changes in operating assets and liabilities:
Other assets (31,068)
Security deposits (161,100)
Accounts payable 304,728
Accrued liabilities 456,659
Deferred rent 5,298
-----------
Net cash used in operating activities (1,725,330)
Investing activities
Purchases of furniture and equipment (526,646)
-----------
Net cash used in investing activities (526,646)
Financing activities
Proceeds from issuance of preferred stock 2,989,186
Proceeds from issuances of common stock and exercises of
stock options 24,412
-----------
Net cash provided by financing activities 3,013,598
-----------
Net increase in cash and cash equivalents 761,622
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 761,622
===========
Non-cash item:
Note receivable for common stock $ 2,500
===========
</TABLE>
See accompanying notes.
-8-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
For the period from December 15, 1999 (inception)
to September 30, 2000
1. The Company
Qiave Technologies Corporation (the "Company") was incorporated under the laws
of the Commonwealth of Massachusetts on December 15, 1999. The Company is a
development-stage enterprise engaged in the development and marketing of
security software that provides content and resource protection for systems
operating Microsoft NT, Windows 2000, and Sun Solaris, among others. Since
inception, principal activities have been to perform research, develop
technology, obtain financing and recruit and train employees. Since the Company
does not have a history of revenues and its research programs are not yet in
mass production, the Company is designated as a development-stage company for
financial reporting purposes.
Management believes the funds available at September 30, 2000, combined with
anticipated financing and the merger of the Company as described in Note 7, will
be sufficient to allow the Company to operate through the coming fiscal year.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to risks common to companies in high-technology
industries, including, but not limited to a volatile marketplace, rapidly
changing technology and protection of proprietary rights.
-9-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash equivalents. The risk is minimized by the Company's
policies in which investments have relatively short maturities and are only
placed with highly rated issuers.
Cash Equivalents
The Company considers short-term investments with maturities of less than three
months when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and leasehold
amortization on property and equipment are calculated using the straight-line
method over the following periods:
<TABLE>
<CAPTION>
Estimated Useful Life
---------------------
<S> <C>
Computer hardware and software 3 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of useful life or life of lease
</TABLE>
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards, Accounting for Income Taxes (SFAS 109). Under SFAS 109, the liability
method is used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees (APB 25), and related interpretations in accounting for its
stock-based compensation plan. Compensation cost for stock options granted to
employees and directors, if any, is measured as the excess of the fair value of
the Company's stock at the date of grant over the exercise price. The Company
has adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, Accounting and Disclosure of Stock-Based Compensation (SFAS
123). Under SFAS 123, the Company is required to disclose pro forma net income
(loss) based on the fair-value method of measuring stock-based compensation.
-10-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted for fiscal years
beginning after June 15, 2000. The Company does not anticipate that the adoption
of SFAS 133 will have a material effect on the Company's results of operations
or financial position.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The Company has adopted Interpretation No. 44, which did not
have a material effect on the Company's financial position or results of
operations.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
2000
------------
<S> <C>
Computer equipment $307,419
Software 71,914
Furniture and fixtures 71,415
Leasehold improvements 75,898
--------
526,646
Less accumulated depreciation and amortization 60,214
--------
$466,432
========
</TABLE>
-11-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
4. Shareholders' Equity
On March 22, 2000, the Company effected a common stock split of 3.1137385:1. All
amounts shown have been restated to reflect the split.
Series A Convertible Preferred Stock
On March 23, 2000, the Company entered into the Series A Convertible Preferred
Stock Purchase Agreement, whereby the Company sold 7,143,542 shares of the
Company's authorized Series A Convertible Preferred Stock, no par value, for an
aggregate purchase price of $3,036,238. Each share of preferred stock is
convertible, at the option of the holder, at any time, and without the payment
of additional consideration, in accordance with the agreement and plan of merger
described in Note 7. On October 4, 2000, all of the preferred shareholders
voluntarily converted their preferred stock to common stock, on a one for one
basis. The holders of the Series A Convertible Preferred Stock shall have the
following rights and preferences:
Voting
------
The Series A Convertible Preferred Stock shall vote together with all other
classes and series of stock of the Company as a single class on all actions to
be taken by the Shareholders of the Company. Each share of Series A Convertible
Preferred Stock shall entitle the holder to a number of votes equal to the
number of shares of Common Stock into which each share of Series A Convertible
Preferred Stock is then convertible.
Dividends
---------
The holders of the Series A Convertible Preferred Stock shall be entitled to
receive, when and if declared by the Board of Directors, dividends at the rate
of $0.034 per share and shall be cumulative.
Liquidation
-----------
Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of the Series A Convertible Preferred
Stock shall be entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Series A Convertible Preferred Stock,
to be paid an amount equal to the greater of (i) an amount equal $0.42857140 per
share plus an amount equal to any dividends declared and unpaid or (ii) an
amount had each share been converted to common stock
-12-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
4. Shareholders' Equity (continued)
immediately prior to such liquidation, dissolution or winding up. If upon such
liquidation, dissolution or winding up, the assets to be distributed to the
holders of the Series A Convertible Preferred Stock are insufficient to make
full payment, the assets shall be distributed ratably among the holders of the
Series A Convertible Preferred Stock.
Conversion
----------
The holder of any share of Series A Convertible Preferred Stock shall have the
right, at its option at any time, to convert any such shares into such number of
fully paid and non-assessable shares of Common Stock as is obtained by
multiplying the number of shares to be converted by the original purchase price
and dividing the result by the conversion price of $0.42857140 per share. No
fractional shares shall be issued upon conversion. Fractional shares shall be
paid in cash.
Stock Option Plan
The Company's 2000 Stock Option Plan allows for the granting of non-statutory
stock options to purchase shares of the Company's common stock to eligible
persons as defined in the plan document, as deemed by the Company's Board of
Directors (the "Board"). The Plan allows for the issuance of up to 2,248,125
shares of Common Stock. Options will be evidenced by a written agreement and may
include any other terms and conditions consistent with the Plan, as the Board
may determine. The options generally vest over a four-year period beginning
with 25% on the first anniversary of the date of grant and 6.25% per quarter
over the following three years. Certain of the non-statutory stock options were
vested upon issuance or by the Board of Directors of the Company. Prior to
September 30, 2000, 50,000 of these options were exercised; however, the related
cash payment was not received by the Company until subsequent to year-end giving
rise to a note receivable for common stock. Unless previously terminated,
options granted will terminate on the tenth anniversary of the date of grant.
-13-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
4. Shareholders' Equity (continued)
Stock option information relating to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Options Exercise
Price
-------------------------------------------------
<S> <C> <C>
Granted 1,114,113 $0.05
Exercised (185,500) $0.05
---------
Outstanding at September 30, 2000 928,613 $0.05
=========
Exercisable at September 30, 2000 15,200 $0.05
Weighted average fair value
of options granted during the year $2.56
Weighted average remaining contractual
life of outstanding options 9.49 years
</TABLE>
Pro forma information regarding net loss was computed in accordance with SFAS
123 and has been determined as if the Company accounts for stock options under
the fair value methods of SFAS 123. The fair value of these options was
estimated at the date of grant using the minimum value option pricing model with
the following weighted-average assumptions: risk-free interest rate of 5.74%,
dividend yield of zero and an expected life of the options of ten years. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss would have
increased by approximately $145,000.
During fiscal 2000, the Company granted stock options to employees and elected
directors at an exercise price of $.05 per share, which was less than the market
value of the Company's Common Stock at the time of such grants. The intrinsic
value of the options granted at less than market value totaled $2,552,743 and
was recognized in the balance sheet as a reduction in shareholders' equity
entitled Deferred Stock Compensation, with an offsetting amount recorded to
additional paid-in capital. Deferred Stock Compensation is being recognized as
an expense over the vesting period, generally four years, or immediately for
those individuals whose options were vested upon grant. The stock compensation
expense recognized in fiscal 2000 totaled $70,570.
-14-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
5. Income Taxes
The Company has federal and state net operating loss carryforwards of
approximately $1.3 million available at September 30, 2000 to offset future
taxable income, which expire in fiscal year 2020. The future utilization of the
net operating loss carryforwards may be subject to limitation in the event of a
significant change in stock ownership. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to those carryforwards as their utilization is uncertain at this time.
6. Commitments
The Company leases various equipment, office space and related parking spaces
under non-cancelable operating leases. At September 30, 2000, the future minimum
operating lease payments amounted to:
<TABLE>
<S> <C>
September 30, 2001 $157,214
2002 149,340
2003 158,160
2004 161,490
2005 124,670
--------
Total future lease payments $750,874
========
</TABLE>
Rent expense amounted to $37,398 in 2000.
During the period ended September 30, 2000, the Company entered into three
capital lease arrangements with Dell Financial Services L.P. for certain
equipment. The arrangements provide for total payments of principal and interest
totaling $15,831 to be paid over a term of 36 months. During October 2000, the
Company agreed to lease buyout amounts for all three leases totaling $11,991.
On March 27, 2000 the Company entered into a license agreement with Certicom
Corporation. The agreement provides for technology to be used in the Company's
product, which is in the development stage, for a one-time base fee, a support
fee of $30,000 and royalties at the rate of 2 1/2%. The license agreement
requires that 50% of the support fee is payable within 60 days of the inception
of the agreement. An additional 35% of the fee is due within 180 days of the
inception of the agreement and the remaining 15% is payable within 364 days of
the inception of the agreement.
-15-
<PAGE>
Qiave Technologies Corporation
(A Development-Stage Company)
Notes to Financial Statements
6. Commitments (continued)
On August 16, 2000, the Company entered into an agreement to lease 12,648 square
feet of office space in Waltham, Massachusetts for a term of five years
commencing on April 1, 2001 and ending on March 31, 2006. The lease provides for
rent of $200,000 in its first year escalating to $264,600 in the final year of
the lease.
7. Subsequent Events
On October 4, 2000, the Company executed an agreement and plan of merger with
WatchGuard Technologies, Inc., a publicly held corporation located in Seattle,
Washington. Under the terms of the merger agreement, Qiave has become a wholly
owned subsidiary of WatchGuard Technologies, Inc. In accordance with the terms
of the agreement, all shares of any class of capital stock of the Company held
by the Company as treasury shares were canceled. Each share of the Company's
common stock and Series A preferred stock was canceled and converted into the
right to receive a certain number of shares of WatchGuard Common Stock to be
determined by dividing the total number of shares of WatchGuard common stock
equal to $70 million, less adjustments, by the fully diluted number of Qiave's
common stock outstanding immediately prior to the merger. Qiave options to
purchase common stock were similarly converted into options to purchase
WatchGuard common stock.
-16-
<PAGE>
(b) Unaudited Pro Forma Financial Information
The following unaudited pro forma combined condensed financial statements
of WatchGuard Technologies, Inc. give effect to WatchGuard's October 4, 2000
acquisition of Qiave Technologies Corporation, using the purchase method of
accounting. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. The estimated fair values of the assets and liabilities
of Qiave have been combined with the recorded values of the assets and
liabilities of WatchGuard in the unaudited combined condensed financial
statements. The unaudited pro forma combined condensed balance sheet gives
effect to the purchase as if it had occurred on September 30, 2000. The
unaudited pro forma combined condensed statement of operations for the period
from December 15, 1999 (date of inception) through September 30, 2000 for Qiave,
and the nine months ended September 30, 2000 for WatchGuard, give effect to the
Qiave acquisition as if it had occurred on January 1, 2000. Because operating
results from Qiave for the period from December 15, 1999 (date of inception)
through December 31, 1999 are not considered to be material, the pro forma
combined statement of operations for the period ended December 31, 1999 has not
been included.
The unaudited pro forma combined condensed financial statements are for
illustrative purposes only. They do not purport to represent what WatchGuard's
financial position or results of operations would actually have been if the
acquisition had occurred on these dates, and do not project WatchGuard's
financial position or results of operations as of any future date or for any
future period. The unaudited pro forma combined condensed financial statements
and related notes should be read in conjunction with the historical financial
statements of WatchGuard included in its: (a) Annual Report on Form 10-K/A for
the year ended December 31, 1999 and (b) Quarterly Reports on Form 10-Q for the
quarters ended September 30, 2000, June 30, 2000 and March 31, 2000 (unaudited),
as well as the historical financial statements of Qiave and related notes
included in this report.
The unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of WatchGuard and Qiave to
account for the acquisition as a purchase. Accordingly, the assets acquired and
liabilities assumed are reflected at their estimated fair values.
The unaudited pro forma financial information has been prepared based on
the assumptions described in the related notes and includes assumptions relating
to the allocation of the consideration paid for the assets of Qiave based on the
estimates of their fair value. In the opinion of WatchGuard, all adjustments
necessary to present fairly such unaudited pro forma financial information have
been made, based on the terms and structure of the acquisition.
-17-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
------------------------------------------
As of September 30, 2000
------------------------
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
WatchGuard Qiave Pro Forma Pro Forma
------------ -------- ------------ ----------
Adjustments Balances
------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,612 $ 762 $ -- $ 27,374
Securities available for sale 89,856 -- 89,856
Accounts receivable, net 11,772 -- -- 11,772
Inventories 5,488 -- -- 5,488
Prepaid expenses and other 2,609 3 -- 2,612
-------- ------- -------- --------
Total current assets 136,337 765 -- 137,102
Equipment and furniture, net 5,324 466 -- 5,790
Goodwill and other intangibles, net 4,773 -- 45,650 a 50,423
Deposits and other assets 468 189 -- 657
-------- ------- -------- --------
Total assets $146,902 $ 1,420 $ 45,650 $193,972
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,033 $ 305 $ -- $ 6,338
Accrued expenses 3,763 461 400 a 4,624
Deferred revenue 9,869 -- -- 9,869
-------- ------- -------- --------
Total current liabilities 19,665 766 400 20,831
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 25 27 (26) a,b 26
Qiave Series A Convertible Preferred Stock -- 2,989 (2,989) b --
Note receivable for common stock -- (2) 2 b --
Additional paid-in capital 159,730 2,553 67,091 a,b 229,374
Stock-based compensation (795) (2,482) (16,860) a,b (20,137)
Accumulated other comprehensive loss (44) -- -- (44)
Accumulated deficit (31,679) (2,431) (1,968) a,b (36,078)
-------- ------- -------- --------
Total stockholders' equity 127,237 654 45,250 173,141
-------- ------- -------- --------
Total liabilities and stockholders' equity $146,902 $ 1,420 $ 45,650 $193,972
======== ======= ======== ========
</TABLE>
----------------------------
The accompanying notes are an integral part of these financial statements.
-18-
<PAGE>
WATCHGUARD TECHNOLOGIES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
----------------------------------------------------
For the Nine Months Ended September 30, 2000
--------------------------------------------
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
WatchGuard Qiave Pro Forma Pro Forma
----------- --------- ------------ ----------
Adjustments Balances
------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues $40,777 $ -- $ -- $ 40,777
Cost of revenues 14,608 -- -- 14,608
------- -------- -------- --------
Gross margin 26,169 -- -- 26,169
Operating expenses:
Sales and marketing 17,375 642 -- 18,017
Research and development 9,195 778 -- 9,973
General and administrative 4,107 998 -- 5,105
Stock-based compensation 657 70 14,555 d 15,282
Amortization of goodwill and other intangibles 1,104 -- 8,242 c 9,346
------- -------- -------- --------
Total operating expenses 32,438 2,488 22,797 57,723
------- -------- -------- --------
Loss from operations (6,269) (2,488) (22,797) (31,554)
Interest income, net 4,529 57 -- 4,586
------- -------- -------- --------
Net loss $(1,740) $(2,431) $(22,797) $(26,968)
======= ======== ======== ========
Basic and diluted net loss per share: $(0.08) $(1.13)
======= ======
Shares used in computation of basic and diluted
net loss per share 22,882 1,060 23,942
======= ======== ======
</TABLE>
--------------------
The accompanying notes are an integral part of these financial statements.
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WATCHGUARD TECHNOLOGIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
---------------------
The total consideration paid for Qiave was approximately $70 million,
including approximately $400,000 in direct acquisition costs, and was comprised
of 1,292,997 shares of WatchGuard common stock, including 299,495 shares that
are subject to restriction. Total consideration for Qiave includes $19.3 million
in deferred stock-based compensation charges, of which $15.0 million relates to
the issuance of restricted common stock. In addition, options to purchase shares
of Qiave common stock that were outstanding at the time of the merger were
assumed by WatchGuard and converted into options to purchase 100,856 shares of
WatchGuard's common stock at an exercise price of $0.46 per share. Deferred
stock-based compensation associated with the conversion of Qiave stock options
was $4.3 million.
The aggregate purchase price was allocated as follows based on estimated
fair values on the acquisition date, as determined by an independent appraisal,
and excludes $19.3 million in consideration related to deferred stock-based
compensation for common stock subject to restriction and unvested options to
purchase common stock (in thousands):
<TABLE>
<S> <C>
Fair value of Qiave tangible assets, net of current liabilities.... $ 654
Intangible assets:
Acquired workforce............................................ 592
Current technology............................................ 13,351
Goodwill...................................................... 31,707
-------
Total intangibles.................................................. 46,304
Acquired in-process research and development....................... 4,399
-------
Total purchase price............................................... 50,703
Deferred stock-based compensation.................................. 19,343
-------
Total consideration, including deferred stock-based compensation... $70,046
=======
</TABLE>
Acquired workforce. The value assigned to the workforce in place was
determined using the avoided cost approach. Under this approach, the workforce
is valued according to the costs WatchGuard avoided by obtaining a pre-existing,
trained and fully efficient team rather than assembling a workforce.
Current technology. Values assigned to the developed technology were
determined using the income approach. Under the income approach, fair value
reflects the present value of the projected earnings that are expected to be
generated by the current technology. To determine the value of the developed
technology, WatchGuard discounted the expected future cash flows of the
existing technology products at a rate of 25%, taking into account risks related
to the characteristics and applications of each product, existing and future
markets, and assessments of the life-cycle stage of each project. Based on this
analysis, WatchGuard capitalized the existing technology that had reached
technological feasibility. The projected revenues used in the income approach
are based on the future revenues that will most likely be generated by the
commercial sales of the technology.
Deferred stock-based compensation. In connection with the employment
agreements and related stock retention agreements with four of Qiave's key
employees, a portion of the shares of common stock otherwise issuable to these
employees pursuant to the merger agreement have been retained and are being held
by WatchGuard. These
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shares will be released to the employees over a two-year vesting period. The
value of this stock has been recorded as deferred stock-based compensation,
based on the fair value of WatchGuard common stock on the closing date of the
merger. WatchGuard also recorded deferred stock-based compensation in connection
with WatchGuard's assumption of unvested options to purchase Qiave common stock,
based on the intrinsic value of the unvested options at the closing date of the
merger.
Acquired in-process research and development. Values assigned to the
acquired in-process research and development, or IPR&D, were determined using an
income approach. To determine the value of the IPR&D, WatchGuard considered,
among other factors, the state of development of each project, the time and cost
needed to complete each project, expected income, and associated risks, which
included the inherent difficulties and uncertainties in completing the project
and achieving technological feasibility and risks related to the viability of
and potential changes in future target markets. This analysis resulted in
amounts assigned to IPR&D projects that had not yet reached technological
feasibility and do not have alternative future uses. The entire $4,399,000
allocated to acquired IPR&D was expensed on the date of acquisition.
At the time of the acquisition, six in-process research and development
projects were identified as being related to future products for which
technological or commercial feasibility had not yet been established and that
did not have an alternative future use. WatchGuard analyzed each project, using
estimated percentage completion factors ranging between 10% and 85%. Revenue
attributable to Qiave's IPR&D was assumed to increase after each of the first
three years of a five-year projection period after the year of introduction, at
annual rates ranging from 60% to 216%, decreasing to a 27% growth rate in
revenues after the fourth year in the projection. Projected annual revenues
related to in-process technology ranged from approximately $1.1 million to $14.8
million over the term of the projections. These projections were based on
aggregate revenue growth rates for the business as a whole, anticipated growth
rates for the Internet security market, anticipated product development and
product introduction cycles and the estimated life of the underlying technology.
Gross profit was assumed to remain at 93% of revenues for each of the five
years of the projection period. Operating expenses, including sales and
marketing, research and development and general and administrative costs, were
assumed to be 48% of revenues in the initial year of the projection, declining
to 44% for each of the four remaining years.
WatchGuard used a 35% discount rate for valuing the acquired IPR&D. In
arriving at the discount rate, WatchGuard considered the implied rate of the
transaction and the weighted average cost of capital. WatchGuard also took into
account risks related to the characteristics and applications of each project,
existing future markets, and assessments of the life cycles of each project.
2. PRO FORMA ADJUSTMENTS FOR QIAVE
-------------------------------
Estimates of the fair values of the assets and liabilities of Qiave have
been combined with those of WatchGuard in the unaudited pro forma combined
condensed financial statements. Approximately $4.4 million in costs associated
with the Qiave acquisition were expensed as in-process research and development
costs under the purchase method of accounting, and were not included in the pro
forma combined condensed statement of operations because they are considered to
be a one-time, nonrecurring charge. Pro forma adjustments for the combined
condensed statement of operations and the combined condensed balance sheet
include the following:
(a) To record the purchase of Qiave with the issuance of WatchGuard's
common stock and to record the excess of the purchase price over the
estimated fair value of assets and liabilities acquired in connection
with the Qiave acquisition, in addition to approximately $400,000 of
acquisition costs. In process research and development costs of $4.4
million were immediately expensed upon acquisition, which is reflected
in the pro forma combined balance sheet at September 30, 2000.
(b) To eliminate the historical equity of Qiave.
(c) To record the amortization of the excess of the purchase price over
the estimated fair value of assets and liabilities acquired in
connection with the Qiave acquisition. The intangible components of
the
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consideration for this transaction, which include goodwill and other
purchased intangibles, will be amortized on a straight-line basis over
periods ranging from three to five years.
(d) To record amortization of deferred stock-based compensation related to
the Qiave acquisition. Approximately $15.0 million in deferred stock-
based compensation was recorded as the result of the issuance of
restricted shares pursuant to the employment agreements between
WatchGuard and four key employees of Qiave, and will be amortized over
a two year vesting period using a graded vesting approach. An
additional $4.3 million in deferred stock-based compensation was
recorded in connection with WatchGuard's assumption of options to
purchase Qiave common stock, and will be amortized using a graded
vesting approach over periods ranging from 39 months to four years.
Amortization of deferred compensation for the nine months ended
September 30, 2000 was $657,000 for WatchGuard and $70,000 for Qiave.
The allocation of the stock-based compensation expense associated with
the functional operating expense categories of sales and marketing,
research and development and general and administrative was $136,000,
$465,000, and $56,000, respectively, for WatchGuard and $0, $30,000,
and $40,000, respectively, for Qiave. The allocation of the pro forma
adjustment of approximately $14.6 million for the amortization of
stock-based compensation associated with the functional operating
categories of sales and marketing, research and development and
general and administrative was approximately $1.7 million, $12.7
million and $94,000, respectively.
3. PRO FORMA LOSS PER COMMON SHARE
-------------------------------
Basic and diluted pro forma earnings per share are computed using the
weighted average number of WatchGuard common shares outstanding during the
period plus shares of WatchGuard common stock issued in connection with the
Qiave acquisition. Shares issued in connection with the Qiave acquisition are
assumed to be issued and outstanding on January 1, 2000.
4. CONFORMING AND RECLASSIFICATION ADJUSTMENTS
-------------------------------------------
There were no adjustments required to conform the accounting policies of
Qiave. There have been no intercompany transactions.
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<PAGE>
(c) Exhibits
2.1 Agreement and Plan of Merger dated as of October 4, 2000 by and among
WatchGuard Technologies, Inc., Qiave Technologies Corporation, Logan
Acquisition Corporation and John J. Danahy, Timothy Donnelly, Larry
Rose and Ryan Berg*
10.1 Registration Rights Agreement dated October 4, 2000, by and among
WatchGuard Technologies, Inc. and each of the stockholders of Qiave
Technologies Corporation*
23.1 Consent of Ernst & Young LLP, independent auditors
--------------------
* Previously filed.
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this current report on Form 8-K/A to be signed on its
behalf by the undersigned thereunto duly authorized.
December 1, 2000 WATCHGUARD TECHNOLOGIES, INC.
By: /s/ Michael E. McConnell
-------------------------------------
Michael E. McConnell
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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<PAGE>
EXHIBIT INDEX
Exhibit No.
2.1 Agreement and Plan of Merger dated as of October 4, 2000, by and among
WatchGuard Technologies, Inc., Qiave Technologies Corporation, Logan
Acquisition Corporation, and John J. Danahy, Timothy Donnelly, Larry
Rose and Ryan Berg *
10.1 Registration Rights Agreement dated October 4, 2000, by and among
WatchGuard Technologies Inc. and each of the stockholders of Qiave
Technologies Corporation *
23.1 Consent of Ernst & Young LLP, independent auditors
--------------------
* Previously filed.
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